Co-op underlying mortgage: what you should know before buying

An underlying mortgage is an original loan taken out by a co-op to finance the purchase of the land or building that it occupies. It’s called “underlying” because it comes before (or under) any personal loans that individual shareholders have taken out to purchase their apartments. Co-op buyers should know that these underlying mortgages are paid for in their monthly maintenance fees. In cases when these mortgages have been paid off a co-op resident’s maintenance fees should drop considerably. But this rarely happens as we’ll explain.

Why co-op’s rarely pay off their mortgages

If a co-op wishes to pay off their mortgage they will obviously be paying a principal payment as well as an interest payment. This payment is much higher than just paying an interest payment. So, most co-ops have underlying mortgages with interest-only payments that keep their maintenance fees down. In addition, If shareholders can prove that their monthly dues are used to cover payments on the co-op’s land or building, they can use the interest on the mortgage-related portion of those dues as a tax write-off.

Why co-ops steer clear of certain types of mortgages

If the co-op association’s board elects to take out an adjustable-rate or a balloon mortgage, in the event of an interest-rate spike, the whole co-op may be in peril if the residents cannot afford the new payment. In addition to losing their equity share in the underlying property, shareholders could be evicted from their co-op due to bankruptcy and or bank foreclosure. The residents will remain responsible for paying off the secondary mortgage on their former unit. Thus, it is worthwhile for buyers to inquire about the kind of underlying mortgage a co-op has and request to see documentation before they purchase.